Friday, August 17, 2012

Bull Market Under Your Nose

When will investors feel comfortable seeking growth?  That seems to be the question that nobody can answer.  However, in this environment that has yielded such low returns for savers, they have not exactly been sitting on the sidelines.  Wall Street seems to think that if the high flying growth names are not moving then investors must be sitting on the sidelines.  I contend that with multiple market blowups in the ten year period of time ranging from 2000-2009, that individual investors have simply become wiser.  Sure the herd mentality will always exist, but there are signs of strength.

The S&P 500 Index has been on quite a roll.  Unfortunately, it has not received much attention, but for those paying attention it really shows how important the dividend payers have been to the surge in this large cap index.  Can we stop talking about Facebook (FB)?  Who cares!  Investors do not want to hear about Facebook.  They want to hear about yield and the opportunity to possibly yield more than the near 0% they are receiving in their saving’s accounts.  On the night of Sunday June 3rd, CNBC ran a live “Markets In Turmoil” special.  I couldn’t really see what turmoil they were referring to being that the S&P 500 was still up 2.57% year-to-date at that time.  Since the special aired, the S&P 500 has gained 10.33% as of the close on August 14th.  I guess we can see who contributes to the herd mentality.

Strength exists and it can be found in the dividend payers.  Over the last three years the S&P 500 has gained 48.83%.  Where has the strength in the index come from?  Growth has contributed, but when you look at the performance of the large cap WisdomTree Dividend ex-Financials ETF (DTN) you will clearly see that it has been large cap dividend payers leading the charge.  Over the last three years DTN has gained 74.13%.  Its run may not be over.  As the markets continue to sort out the level of uncertainty in the world and our own economy, I believe investors will continue to seek yield.  DTN still sports an attractive dividend yield versus the S&P 500 Index.  DTN’s trailing twelve month yield is 3.66% compared to the S&P 500 (SPY) which is 1.95%.

For over a decade we heard how crappy the S&P 500 performed.  Now we hear nothing about how well it has performed.  Soon it will become a hot topic in the financial media which will help push the herd in the markets direction.  Unfortunately, I believe by that point most of the good gains would have already been gotten. 

Thank you and good luck everyone!

Disclosure:  I do not own DTN or SPY

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”; Manager/Creator of the AFL Model Portfolios available for members of Allocation For Life in self-directed accounts at Folio Investing